"Our public finances have become the worst of any developed country," Kan warned.

"Like the confusion in the eurozone triggered by Greece, there is a risk of collapse if we leave the increase of the public debt untouched and then lose the trust of the bond markets," he said.

While Kamei's departure, sparked by a spat over a controversial bill to roll back postal privatisation, removes one obstacle, how aggressively Kan can implement fiscal reforms will depend on the results of an upper house of parliament election, likely to be held on July 11.

Support for the Democrats has jumped since Kan took over, and Kamei's resignation could be another plus, analysts said.

"My sense is that Kamei leaving will probably increase public support for Kan… It's a good thing, because Kamei was constantly baiting the prime minister and undermining the authority of the office," said Gerald Curtis, a Columbia University professor.

Yoshito Sengoku, the cabinet secretary, will temporarily take on Kamei's post but told a news conference that Kan wanted to pick a new banking minister.

Satoshi Arai, the national strategy minister, told reporters the government was aiming to compile a medium- and long-term plan for reining in debt by June 22.

Kan, Japan's fifth premier in three years, has called for a bipartisan debate on raising Japan's 5 per cent sales tax to help fund bulging social welfare costs in an ageing society, while Kamei had been cautious about such a move.

Looming polls

Fiscal reformers in the Democratic party want an election manifesto due out soon to include a reference to increasing the tax after the next general election, due by late 2013.

Rating agencies have warned they could cut Japan's sovereign debt rating unless Tokyo produces a credible plan to rein in debt that is about twice the size of the economy, the worst among industrialised nations.

But analysts say the Democrats, who swept to power promising to put more cash in consumers' hands to boost domestic demand, would need to abandon some election pledges to slash spending.

Kamei's People's New party (PNP), whose votes the Democrats need for now to maintain an upper house majority, will stay in the coalition despite his departure from the cabinet.

Kamei, known for his calls for big spending, his attacks on free-market capitalism, and his pressure on the Bank of Japan to do more to fight deflation, formed the PNP in 2005 with a band of rebels from the then-ruling Liberal Democratic party to protest plans to privatise Japan Post.

His resignation comes after the Democrats rejected his call to extend the current session of parliament, set to end on June 16, to enact a bill that would roll back those privatisation plans.

Many Democrats want the upper house election to take place as soon as possible to capitalise on a big leap in voter support after Kan's instalment as prime minister, and extending the parliamentary session more than a day or two would have pushed back the upper house vote.

Analysts still question whether the Democrats can win an outright majority in the 242-seat upper house, but the party's chances have clearly improved since Kan took over from Hatoyama, who quit with his ratings in shambles just nine months after the Democrats swept to power.